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THE city runabout is about to go upmarket. Volkswagen has dropped a bombshell on the emerging ''tiddler" segment by introducing a small car with a starting price of just $13,990, plus on-road costs.

The Up will be the cheapest Volkswagen offered in Australia since the 1980s and will go head-to-head with Korean and Japanese brands at the most price-sensitive end of the new car market.

Volkswagen also expects the car to entice buyers who may otherwise have bought a second-hand car.

It's a radical departure for a brand that has successfully pitched itself as an upmarket alternative to mainstream Japanese small cars.

But the managing director of Volkswagen Australia, Anke Koeckler, said the car is important because it will introduce new buyers to the brand, competing against cheap runabouts, including the Suzuki Alto, Holden Barina and Nissan Micra.

"It will be interesting to see whether we can create another segment," Koeckler said.

"I think there is a tendency of consumers to go for downsizing. More and more people know they can get the assets of a big car in a small car, and small is beautiful."

Koeckler predicts the price will tempt buyers who previously considered a European badge out of their price bracket.

"I think that we will get much more from the competitors," she said.

"In previous times, they (buyers) were looking at driving a Volkswagen, but it was not affordable for them."

Koeckler is not willing to make a short-term prediction on sales but said the car was not a niche offering.

She predicted that within three years the tiddler segment will have established itself as an important part of the overall car market.

The Up will be available as a three or five-door hatchback (which starts at $14,990 plus on-roads), and is powered by a tiny 1.0-litre engine putting out just 55kW of power and 95Nm of torque.

It is only available with a five-speed manual transmission, limiting its showroom appeal in a segment traditionally dominated by automatics.

A self-shifting gearbox is offered overseas but was not available for the local launch.

The car will introduce a new level of technology to the city runabout segment, including an advanced crash-avoidance system that, until now, has been reserved for luxury cars or more expensive models.

The City Emergency Braking system uses lasers to detect an imminent rear-end collision and can automatically apply the brakes. T

he system is claimed to potentially avoid crashes at speeds slower than 30kmh and minimise the impact at higher speeds.

But the Up also misses out on some features taken for granted in its competitors.

It has only four airbags, with no head-protecting airbags for back seat passengers, even though other cars of similar size and price come with six airbags.

However, it still achieves the maximum five-star Euro NCAP safety rating.

Bluetooth connectivity, which is also common in the segment, is optional.

The rear windows only pop out rather than wind up and down and there are only four seats.

Prestige paint adds $500 to the price, while cruise control and rear parking sensors cost $600, and a sunroof costs $1400.

To get Bluetooth connectivity, buyers will have to pay another $500 to get a clip-in sat nav unit that also incorporates media streaming, a detailed trip computer and a series of read-outs designed to help the owner drive more economically.